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Sunday, December 21, 2014

No True Economist

"More irritating than someone's actual stupidity is their mouthing a scientific vocabulary...One of the worst intellectual catastrophes is found in the appropriation of scientific concepts and vocabulary by mediocre intelligences,"
--Nicolas Gomez-Davila, 1992

"The humanities have, in adopting jargon, tried to ape the sciences without grasping the actual nature of scientific thinking. In other respects, they have consciously and dogmatically rejected the scientific model altogether."
--Dennis Dutton, 2003

I'm sick of writing about economics and maybe you're sick of reading about it as well, but I just have to make one more point before I let it go for now. Last time I linked to a response to the BBC program about the rebellion against economics education. Here is that link again:

Every defense of the economics profession seemingly boils down to the exact same arguments as far as I can tell:

1.) The economists don't really believe the stuff they are saying. They are just rules-of-thumb, metaphors, and simplified models to teach abstract thinking and basic concepts to first-year students and elementary textbook readers: "We typically introduce markets with the model of "supply and demand," and the exercise of thinking in terms of models provides much of the lasting value of studying economics. Working with economic models can sharpen students' logical and critical thinking skills immensely. As John Cochrane nicely put it recently, 'economic models are quantitative parables, not explicit and complete descriptions of reality.'"

2.) The "true" economics discipline does not condone what is currently taking place in the actual policy world that most of us live under: "Some of this may be rooted in the fact that the "economics" articulated by politicians, government officials and the press - what Simon Wren-Lewis has called "mediamacro" - does not reflect the views of most of mainstream academic economics. In particular the obsession with government budget deficits is not based on textbook economics."

3.) The problem is not us, it's those people over there (point finger at scapegoat). They are abusing the doctrine. "We do suffer from an excess of libertarians who mistakenly believe that economic theory validates their views..."

4.) The real world is just too complex difficult to understand, and even though economics have control over seemingly everything in society and dictate policy to politicians to stimulate growth at all costs, they're not really that good at what they do: "Looked at this way, expectations for macroeconomic forecasting should be set very low. And indeed, it turns out that those macroeconomists that devote their career to providing forecasts are pretty lousy at it. In fact, there’s some evidence that those who appear to do better than others might just be lucky."

5.) The 'real world' will just muddy the waters for people trying to learn the basics: "While it can be exciting to be teaching a subject that is relevant to contemporary events, we should not be seduced into bringing "news" into the classroom in a way that interferes with developing an understanding of the fundamentals."

Isn't it convenient to blame "those people" (certain politicians and economists) for all your profession's problems? If nothing can be definitively asserted by economists, why have them at all? Why do they sit on government policy boards, advise heads-of-state, speak in the media, run financial institutions like the Federal Reserve, the WTO and the IMF, run all the world's central banks, serve as university presidents, dictate policies for the developing world, design "structural adjustment policies," have all those conferences in national capitals all around the world, etc., etc.?

Another example of economists circling the wagons is the response to a book by author Jeff Madrick called Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World:

Their litany of error, Madrick insists, stems from reliance on Adam Smith’s Invisible Hand theory: that, without any outside interference, buyers and sellers will reach a just accommodation. This 18th-century insight, writes the author, was descriptive rather than prescriptive and surely an incomplete model of modern markets. Its simplicity encouraged the modern era’s move toward widespread deregulation. From the Freidmanites’ horror at the prospect of government intervention flowed other bad ideas: that “supply creates its own demand” and economies will self-adjust; that government is useful only for correcting occasional market failures; that targeting inflation is all that really matters; that markets are highly rational, unsusceptible to fashion or speculative bubbles; that globalization will somehow triumph, and free trade will lift all boats.

Yet now the economists say they believed no such thing! When the failed ideas of economists are laid bare, they suddenly run from them like cockroaches when the light is turned on and claim post-hoc that they never believed in them in the first place.

And the other response, as above, is to blame the "bad" economists and politicians for listening to them and promoting their ideas. Here Paul Krugman's review of Madrick:

No. 2 on Madrick’s bad idea list is Say’s Law, which states that savings are automatically invested, so that there cannot be an overall shortfall in demand. A further implication of Say’s Law is that government stimulus can never do any good, because deficit spending by the public sector will always crowd out an equal amount of private spending.

But is this “mainstream economics”? Madrick cites two University of Chicago professors, Casey Mulligan and John Cochrane, who did indeed echo Say’s Law when arguing against the Obama stimulus. But these economists were outliers within the profession. Chicago’s own business school regularly polls a representative sample of influential economists for their views on policy issues; when it asked whether the Obama stimulus had reduced the unemployment rate, 92 percent of the respondents said that it had. Madrick is able to claim that Say’s Law is pervasive in mainstream economics only by lumping it together with a number of other concepts that, correct or not, are actually quite different.

Now, it’s true that the relative handful of economists claiming that stimulus can’t possibly work, or that slashing government spending is actually expansionary, have a much higher profile than their numbers or their influence within the profession warrants. Why? Partly, the answer is that the news media — especially but not only partisan media like The Wall Street Journal’s editorial page — have promoted the views of economists they like for political reasons. Partly, also, it’s because politicians listen to economists who tell them what they want to hear. I’m not saying that mainstream economists bear none of the blame; the decades-long retreat from Keynes has undoubtedly allowed old fallacies to make a comeback. But austerity mania has to a large extent spread despite mainstream economics, not because of it.

It's the same argument - "those guys" are the "bad economists" who are just misusing the doctrine to tell the rich what they want to hear. "We" are the "good" economists with the real truth, it's just that no one will listen! Alan Blinder, another member of the priesthood, made the same argument in his review. It's gated, but here are some excerpts:

…and mainstream doctors are not held responsible for homeopathy…. John Cochrane, also of the University of Chicago… saying in 2009 that Keynesian economics is ‘not part of what anybody has taught graduate students since the 1960s. [Keynesian ideas] are fairy tales that have been proved false.’ The first statement is demonstrably false; the second is absurd…. Madrick’s second bad idea, Say’s Law… really is bad…. Madrick also tabs ‘low inflation is all that matters’ as a bad idea, which it is. But again, who believes it?… Perhaps you can imagine my surprise when I read that ‘economists in general are Friedman’s handmaidens.’… Eugene Fama…. As Madrick correctly states, the… strong form of the EMH… proved pernicious…. Madrick’s wonderful chapter on efficient markets should be required reading for everyone in the financial world…

And here it is again in the above Medium piece:

I genuinely do not recognise the economics profession in this description, nor indeed the description of the actual economy...Truth is, Thatcher and Reagan were not people that influenced the thinking of mainstream economists. Rather, they were politicians that were heavily influenced by the views of people like Milton Friedman and other economists from the so-called Chicago school. However, the Chicago school’s viewpoints were never representative of the “median economist” and said median economist’s viewpoints on market liberalisations and regulation are generally boringly subtle.

Yes, that's not the "real" economics profession you're talking about. That's not the "mainstream" despite being trumpeted constantly by talk radio, FOX news, the Wall Street Journal, Forbes, the entire Republican Party, the University of Chicago, George Mason University, EconTalk, the Cato institute, the Heritage Foundation, a thousand other think-tanks and popular books, etc...

No True Scotsman is a logical fallacy by which an individual attempts to avoid being associated with an unpleasant act by asserting that no true member of the group they belong to would do such a thing... Instead of acknowledging that some members of a group have undesirable characteristics, the fallacy tries to redefine the group to exclude them. Sentences such as "all members of X have desirable trait Y" then become tautologies, because Y becomes a requirement of membership in X.

Is God willing to prevent evil, but not able? Then He is not omnipotent. Is He able, but not willing? Then He is malevolent. Is He both able and willing? Then whence cometh evil? Is He neither able nor willing? Then why call Him God?

Are economists able to make the economy better? If not, then they are incompetent. Are economists able but unwilling? Then they are malevolent. Are they able and willing, but unable to have any influence over actual economic policy? Then they are impotent. Are they none of these? Then whence cometh the declining economy?

Are economists evil, incompetent, ignorant or impotent? Because they must be at least one of these things. Or are they just corrupt? The economics doctrines that "supposedly" are not a part of economics study have been used to literally reorder the world over the past generation. That is, they have been translated into actual policy by governments.Yet we're told that it's somehow not really what economists believe? WTF?

According to the above author, the economics profession is actually all about the limitations of the free market:

...an enormous amount of undergrad economics education focuses on the many ways that free markets fail to produce the best outcome. After the standard treatment of supply and demand, most of the rest of undergrad microeconomics focuses on the many reasons why free and unregulated markets produce bad outcomes. Industrial organisation focuses on problems due to imperfect competition, public economics focuses on externalities and inequality, advanced micro focuses on problems caused by asymmetric information, game theory focuses on co-ordination problems and so on.

In addition, mainstream macro at the vast majority of universities is distinctly Keynesian in focus, emphasising the sub-optimality of a laissez faire approach and the need for systematic use of fiscal and monetary policy to promote macroeconomic stability...In fact, the economics textbooks are so full of arguments for intervention, it might be surprising that economists are not a bunch of radical interventionists.

Okay then. So has this had any effect on actual policy in the last, oh I don't know forty years or so? Because whenever I open the paper, I see politicians arguing that we need to privatize everything, shrink the government, cut taxes on the rich, bust unions, not raise the minimum wage, sign a new trade agreement, ignore monopolies, etc. Why are these theories which are allegedly in contradiction to the received wisdom of economics by far the most popular in the country? If all of this is in contradiction to what economics teaches, then that is an even more serious problem than any criticism the BBC or Jeff Madrick can make.

For example, the deregulation of banks was actually accomplished, and we are dealing with the fallout. The privatization of things actually happened. Enron actually happened. The bailouts actually happened. Glass-Steagall was actually repealed. Again, "those guys" justified it. What about sending American jobs overseas? Well, there were a heck of a lot of economists who justified that (including Krugman). What about tax cuts for the rich? "Those guys" again. Privatization of everything under the sun? "Those guys---»"

Consider Alan Greenspan, an economist with actual desicion-making power over the real world being the chairman of the Federal Reserve. According to the above, he was not a true Scotsman economist because he really believed in perfect and efficient markets. But his decisions had huge consequences. Note his sheepish "mistakes were made" non-mea-culpa that opened the BBC piece.

Consider Reinhart-Rogoff that I referred to earlier, whose ideas about austerity were trumpeted around the world because they wrote a paper supposedly "proving" deficits were bad. These economists had real, actual influence over the lives of millions of people. Then it was discovered that there was a spreadsheet error and their conclusions were debunked. Yet they and numerous politicians kept pushing those ideas.

Or consider Milton Friedman. His ideas about "maximizing shareholder value" created the shareholder revolution of the 1970's (when wealth started shifting to the rich) and has ruined millions of lives:

As the leader of the Chicago school of economics, and the winner of Nobel Prize in Economics in 1976, Friedman has been described by The Economist as “the most influential economist of the second half of the 20th century…possibly of all of it”. The impact of the NYT article contributed to George Will calling him “the most consequential public intellectual of the 20th century.”

Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.
How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “In a free-enterprise, private-property sys­tem,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders.

Come again?

If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not. The executive is an employee of the corporation...One might think that intellectual nonsense of this sort would have been quickly spotted and denounced as absurd. And perhaps if the article had been written by someone other than the leader of the Chicago school of economics and a front-runner for the Nobel Prize in Economics that was to come in 1976, that would have been the article’s fate. But instead this wild fantasy obtained widespread support as the new gospel of business.

And I think the people of Chile would argue that he was pretty influential. Yet economists want to wash their hands of all of the damage Neoliberalism has wrought over the past forty years and claim their discipline had nothing to do with it.

As for economists’ “influence over the economy,” I am going to take a wild guess and say that it isn't because of their arrogance or hierarchical insularity or “sense of authority and entitlement.” It’s probably because…drumroll…economics is the discipline that studies the economy. If politicians want to know how to reduce cancer rates, they should go to a biologist. If they want to know how to shoot missiles at Vladimir Putin, they should go to a physicist. If they want to know how to boost productivity at U.S. companies, or increase employment, or auction off broadcast spectrum rights, whom should they ask for advice? A sociologist?

Economists have influence over the economy until things go wrong and then they don't. Or they have influence when they get hired for lucrative jobs, but are conveniently ignored when politicians preach the "free market good, government bad" mantra backed by numerous think-tanks lavishly funded by the rich. Yet we're still supposed to take the economics discipline seriously? Come on!

Deindustrialization, globalization, deregulation, obscene salaries for Wall Street and CEOs, insider trading, bubbles, outsourcing, mass immigration, corporate bailouts, subsidies, etc - all of these were supported by at least most members of the economics profession, and there are numerous books, speeches and articles on the record as proof. Yet now they claim that no one is listening to them! Such chutzpah!

And none of this engages with the criticisms of ignoring the roles of power and money, the role of labor, the role of debt, coercion, and so on.

Finally, what brought this whole issue to mind is reading a lot of criticisms of the architectural profession, another insular profession that has failed the public in a lot of ways yet remains stubbornly blind to its mistakes, and has numerous tools to enforce rigid orthodoxy and punish deviants (elite schools, organizations, awards, prizes, shows, magazines, critics, etc.). Here is one quote that applies doubly to economists:

"Human culture--which includes the implicit connections and implications that make coherent thought and action possible--is the greatest of all commons. It is the field in which all life, thought, and social cooperation play themselves out. An attempt to disrupt and destroy something so basic to what we are should be viewed as a crime...The organized thought of an intellectual community is vulnerable to fraud, abuse and vandalism, and it will be degraded unless such actions and those who engage in them are identified, confronted, resisted, and condemned. Such policing must be primarily the responsibility of the malefactor's fellow professionals. If they do not act, and the case seems egregious, the rest of us must form our own conclusions, both as to the specific acts and the degree of respect owed an intellectual community that tolerates them."

"Some Thoughts on Culpability" by James Kalb in Salingaros "Anti-architecture and Deconstruction"

2 comments:

And yet it is undeniable that many people now have vastly more comfortable lives than their ancestors, and I'll bet many of them attribute this, at least partly, to economists. The way it strikes me is that, given huge surpluses of energy and resources (of which we still have plenty yet to plunder, even now), all we needed was a system to allocate it, and a requirement that the whole of society conformed to it.

If a society discovered a huge pit containing all the goods, food, luxuries ever needed, ready-made, it would still need some system to allocate these goods. The people in charge of the system would inevitably believe that it was they who were responsible for society's 'achievements', and the people who were allowed a share of the goods would be very grateful for what they received, especially if, over time, the rate of plundering the pit increased.

That's exactly right - people attribute our living standards to "economics" even though this discipline did not exist during most of the time living standards were increasing. Early economists had real jobs - Malthus was a parson, Ricardo a stockbroker, Smith was a philosophy professor, Mill was a writer and intellectual. The idea of training millions of people just to study "economics" and nothing else was absurd (and should still be). There were a vast diversity of economic arrangements throughout history, yet they claim their version is the only one that can work.

To me, the biggest unacknowledged bias in economics is productivism - the belief that measurable economic productivity and growth are the purpose of human organization (e.g., work), and that "more production is necessarily good". (Wikipedia)

There's a great analogy for this - the Cargo Cult. Just like the natives of Melanesia thought constructing control towers out of bamboo and talking into coconut radios would bring the planes back, the modern discipline of economics spouts nonsense about where prosperity comes from and makes it sound scientific.